Beware the IT jabberwock

By
Canadian Lawyer

07 Apr 2008

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If you’re a business generalist or in-house counsel, you likely wouldn’t try to complete a multimillion-dollar real estate transaction without benefit of counsel specialized in such work. So why would you think of flying solo on a blockbuster deal to acquire vital information technology services for your client or company?

That’s the essence of the message from Duncan Card, a leading member of the IT bar in Canada. Card is a partner and co-chairman of the technology, procurement, and outsourcing practice groups at Bennett Jones LLP in Toronto. He acts for both IT vendors and large buyers of IT products and services, and has written over 250 articles and papers as well as a book, Information Technology Transactions, on the subject. “This is all I do,” Card says, “so I see a tremendous volume of IT transactions on a continuous basis, both from the buyer’s and the vendor’s perspective. In the course of that, you accumulate a lot of business knowledge.”

Yes, it’s an unashamed plug for his own services, and, yes, the message might smack a little of FUD (fear, uncertainty and doubt), the term often applied in the early days of the IT industry to IBM’s disinformation tactics for softening up prospective customers. But Card makes a compelling case. He believes, especially now, lawyers need to hear the message about the risks of entering into big IT transactions without specialized counsel. It’s not as if he’s claiming to be the only source of such advice.

Why now? For one thing, he says, we’re, perhaps surprisingly, entering a period of heated-up activity in the IT sector. While other areas of the economy are slowing, the IT sector, especially the part that provides core products and services to large enterprises, is on a roll, as evidenced by recent upbeat financial news from key vendors such as IBM. When bottom lines are under pressure, Card notes, companies start looking for ways to make themselves more efficient. One way is to upgrade IT infrastructure. Another is to implement major new enterprise resource management (ERP), customer relationship management (CRM), or business intelligence (BI) systems. Still another is to consolidate back-office systems through outsourcing or shared-services arrangements, which can both increase efficiency and reduce IT management costs.

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The relative strength of the Canadian dollar is another factor. “It makes the latest technology more affordable,” Card points out. “Many big banks, telecom companies, manufacturers, transportation companies are looking for an opportunity to upgrade their IT infrastructures, and now is a very good time for them to do it.”

So, many lawyers are seeing increased activity in this space, and will likely continue to do so going forward. Card also argues, however, that much more is riding on these transactions than in the past. IT is increasingly at the heart of what companies do, he says. It’s no longer just a cost centre, it’s often a critical enabler of whatever competitive advantage an enterprise enjoys, a fact reflected in the growing power and influence of IT management in companies.

More importantly, the ascendancy of IT coupled with increased scrutiny of corporate management in general, means the conduct of IT transactions will increasingly be a matter for the audit committee. “These transactions will be scrutinized in the future,” says Card. “How were they conducted? What kind of expertise was brought to bear? Did you have competent staff to negotiate that $100-million outsourcing deal?

“If something goes wrong — and a significant percentage of these transactions do end up involving disputes or dissatisfaction between the parties — who conducted the transaction and why they conducted it the way they did will be looked at. The person who led that deal has to have answers.”

Card seems to ratchet up the FUD when he says vendor lawyers are past masters of the complexities of these transactions, but lawyers in buyer companies will typically only have been involved in one or two such deals. “The vendor’s counsel may always have somewhat of an advantage,” he says. “And buyers routinely underestimate the business complications and challenges of these important transactions.”

Many pitfalls lie in store for the unwary, he warns. Protection of intellectual property rights is just one thorny issue. When a company engages a software vendor to create a highly customized solution, for example, some of the features of that solution may actually be contributed by the buyer’s IT team. And it almost always incorporates work flows and business practices that are proprietary to the buyer and may be the keys to its competitive advantage. Does the vendor have the right to turn around and sell the customizations created for you to other customers, including possibly your competitors? To what extent should it be able to use any of what it has learned about the inner workings of your company in the course of working on a project?

“Those intellectual property rights must be protected,” Card says. “So what’s the line between the customer’s right to protect their often-very secret competitive advantage and the vendor’s reasonable and legitimate right to general industry knowledge and know-how? And how do you demarcate that in the transaction?”

Complex regulatory issues may come into play as well. In some regulated industries, especially health care, privacy of data is a huge concern. How do you protect it when outsourcing data-management services, especially offshore? Some industries are in fact restricted as to how and whether they can outsource IT services.

Many other, equally knotty issues specific to, or particularly complicated in, IT transactions can trip up the untutored: limitation of liability, exclusion of liability provisions, indemnity, service level agreements, and so on.But there are also “well-established industry norms, approaches, and strategies to how you negotiate these issues,” says Card. His point is knowledge of these norms and approaches is very often dangerously lacking in non-specialists.

Many have come to recognize that fact, he says. “I think that especially since Y2K, lawyers, including non-specialist outside counsel, are a lot more careful about what they take on and what they don’t take on in this highly specialized area. The trend is toward a very high level of respect for the IT bar.”

The clear implication, though, is that some don’t get it. Or perhaps they fear losing business to specialists like Card. Which is no doubt why he is careful to make the point that he and other practitioners are more than willing to come in as consultants or outsourced negotiators on a one-off basis and always keep lead counsel in the loop.

For myself, an observer of the IT marketplace and not a lawyer, Card’s cautions about this increasingly tangled area of the law sound like more than just FUD. It seems clear there are real risks for non-specialists going the do-it-yourself route.

Need help with a big IT deal? Card suggests sources that can help you find a competent specialist. One is the Canadian IT Law Association (www.it-can.ca), of which he is a member. There are also listings in various directories of top lawyers in the area that can be helpful in your search.

Gerry Blackwell is a technology writer. He can be reached at gerryblackwell@rogers.com

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